Distressed assets are a hot topic among real estate investors, with many funds pooling their capital to snap up value-priced properties from reluctant bank owners or borrowers unable to refinance their loans. But while investors may find a couple of deals on the market, they will most likely be frustrated if they’re expecting a flood of assets for sale at cut-rate prices, according to a trio of apartment executives at the Multifamily Executive Conference’s CEO Power Panel in Las Vegas last week.

Some distressed communities–properties with borrowers in default on their loans or with loans coming due and unable to refinance or sell–will be available, but the total amount will be very small, said Tom Toomey, President and CEO of UDR, a multifamily REIT that owns almost 45,000 apartments. “I don’t know that there will be that many opportunities,” he said, explaining that many banks will continue to extend loans rather than foreclose and sell the properties. “Investors that raced to get into distress funds are going to be disappointed.”

Dave Woodward, Managing Partner and CEO of Laramar Group, said distress is the new value-add, alluding to the trendy investment rationale many companies favored several years ago. “There is a lot of capital building up and getting ready to be invested soon–our company included,” he said. Laramar, an apartment investment and management firm with more than 30,000 communities in 18 markets, is putting together a fund to invest in distressed properties.

“There are going to be deals out there,” he said. But companies should not expect a large-scale clearance reminiscent of the U.S. government’s Resolution Trust Corporation that liquefied many non-performing assets in the late 1980s and early 1990s, he said. “I don’t see that happening.”

Part of the issue is that special servicers, which represent multiple lenders in commercial mortgage-backed security (CMBS) loans, have little incentive to sell properties at a discount right now, said Christy Freeland, who was recently named Chairman of Riverstone Residential Group, which manages 185,000 apartments across the country. “Servicers can wait three or four years and see if the property’s value or NOI goes up,” she said.

The lack of value opportunities for investors may actually create new opportunities for property management firms such as Laramar, which is doing fee-management work for some special servicers. But such work can often be resource-intensive, especially when many of the communities going into default first are what Woodward described as “C minus minus.” Nevertheless, he said, “You want to get in the door with them and say ‘Yes’ in hopes of getting future business with them.”

Borrowers that own troubled communities, on the other hand, have not been eager so far to change managers, the executives said. “I thought there would be more owners wanting to have a different manager take a look at their community,” Freeland said. “But [owners] are still concerned about change. They’re trying to get financing, so they don’t want to make a wave.” She added, however, that the fear of changing is actually costing owners money because the expense efficiencies with a national management firm are substantial.

While a vibrant, distressed asset market has not materialized, prices are still down about 15 percent to 20 percent, partially because of rising cap rates, Woodward said. But he adds that with increasing competition to bid on available assets, cap rates could begin to stabilize or even drop in the next few months. “People who are waiting for six caps that became seven-and-a-half caps to become nine caps, I think they’re going to be disappointed,” he said.

One property UDR was interested in received bids from 38 companies. “That doesn’t sound like distress to me,” Toomey laughed.

With so much capital going after so few distressed opportunities, investors will have to lower their expectations, Toomey said, and UDR is having that ongoing dialogue with its investors. Rather than focusing on internal rate of return, the company is beginning to measure investments by price-per-door, knowing rents will go up when the economy improves. “I think we’re just lulling through the bottom of this recession,” Toomey said.

Because most lenders will not be offering construction loans for the next two years, the company is considering using its capital to purchase existing communities that are selling at the same price per door for which they were available in 2005.

The CEOs also said they’re turning their focus this year to initiatives that maximize NOI. For more on those initiatives, check out the November issue of UNITS magazine.

Are any NAA members seeing more or fewer distressed properties on the market than they expected? I’d love to hear what our readers have to say.